SEBI Chairman Ajay Tyagi said a certain element of self-discipline by the players themselves could have averted the problems they have landed into after credit defaults and the regulator might not have been required to step in with remedial measures

He said the industry needs to remember the clear distinction between lending and investing and a mutual fund's investment strategy needs to have required elements of safety as well as returns

He also said trustees cannot remain passive participants in the MF ecosystem and they need to step up their efforts as first-level gatekeepers in cases of concerns and lapses

Mumbai: In a tough message for returns-focussed mutual funds, regulator SEBI Chairman Ajay Tyagi on Tuesday said the industry has exposed its fault lines with several risky investments made for want of higher yields and it is high time for them to play as per the rule book and stop compromising on safety.

Referring to the industry's tagline of 'Mutual Funds Sahi Hai' (mutual funds are right), Tyagi said the investors repose a lot of faith and trust in these funds but the industry must remember it takes years to build this trust but even a single event may erode it.

Addressing the mutual fund industry body AMFI's Members Summit here, Tyagi said a certain element of self-discipline by the players themselves could have averted the problems they have landed into after credit defaults and the regulator might not have been required to step in with remedial measures.

He said the industry needs to remember the clear distinction between lending and investing and a mutual fund's investment strategy needs to have required elements of safety as well as returns.

He also said trustees cannot remain passive participants in the MF ecosystem and they need to step up their efforts as first-level gatekeepers in cases of concerns and lapses.

File photo of SEBI chairman Ajay Tyagi. Reuters image.

Trustees need to take immediate remedial steps and inform SEBI and not wait for the regulator to step in and take corrective measures, he said.

"SEBI's primary objective is the protection of investor's interest, based on which we have issued appropriate regulations and circulars from time to time. These regulations and circulars have been drafted with wide consultation with all stakeholders and due analysis. Needless to say that the industry needs to adhere to them and play as per the rule book," he said.

Tyagi said till about a year back, the significant growth of the mutual fund industry was one of the most talked-about success stories of capital markets in India.

But, events in the last year, exposed the fault lines in the industry and showed that a credit event in even one issuer or group could have a contagion effect leading to liquidity risk across the market, he said.

A number of high-profile credit default cases including at IL&FS and DHFL groups have led to mutual funds bearing huge losses.

Stating that the figures speak for themselves, Tyagi said it has been around a year since the defaults started, but the AUM of open-ended debt schemes is yet to reach the AUM levels seen at the end of August 2018.

"Such instances do not reflect well on the industry practices. While SEBI stepped in and took several measures in the interest of the investors, the need for us to step in may not have arisen if many of these measures were taken by the industry itself," he said.

Continuing with his plain-speaking, Tyagi said SEBI's study of liquid schemes showed that in 20 per cent of the instances, the average holding in liquid instruments was less than 5 per cent of AUM as compared to an average net redemption in these schemes of around 19 per cent.

"A certain element of self-discipline by the industry could have averted such a situation," he said.

"The recent events also threw into the spotlight several risky investments made by the industry in the quest for higher yields. The safety of the investment cannot be compromised for want of higher yields. While we have taken steps to restrict such investments, the industry as a whole needs to do its own analysis on a regular basis to avoid such situations in future," he said.

Tyagi also said the role of trustees is pivotal in the mutual fund ecosystem and he wants to see greater proactivity on the part of trustees where there are concerns and lapses.

"However, a balance is required so that it does not hinder the day-to-day operations and fund management activities," he said.

Tyagi said inspections conducted by SEBI has thrown up several issues, some of which are case-specific in nature, but certain issues are quite prevalent in the industry as a whole.

"In this scenario, trustees are not expected to be passive participants in the MF ecosystem. Where there are concerns and lapses, we expect the trustees to step up their efforts as the first level gatekeepers, take remedial steps and immediately make necessary intimations to SEBI and not wait for SEBI to step in and take corrective measures," he said.

On investor outreach, Tyagi said it is encouraging to see an increasing number of millennial and women investors in mutual funds, but there is a large space that remains untapped.

He also pitched for making the process of entry, exit and management of investments simple and easy.

Referring to the government's announcement for improving market access for the domestic retail investors by permitting Aadhar-based KYC for the opening of demat account and making an investment in mutual funds, he said SEBI will work with the government on this with a view to operationalizing the decision.

To further ease the process of investing in mutual funds, a working group had been formed sometime back by SEBI with multiple stakeholders. The group has since submitted the report and we are in a process of implementing its recommendations, he said.

He also said that despite all the measures taken till date by both SEBI and the industry, the numbers with respect to direct plans are not very encouraging, while not much progress has been made in encouraging investments in ETFs.